Foreign Relations of the United States, 1958–1960, Foreign Economic Policy, Volume IV

341. Memorandum of Discussion at the 393d Meeting of the National Security Council⁰

January 15, 1959.

[Here follows a paragraph listing the participants at the meeting.]

1. East-West Trade (Foreign Assets Control Regulations) (NSC 5704/3;¹ NSC Action No. 1944;² Memo for NSC from Executive Secretary, same subject, dated December 23, 1958³)

In briefing the National Security Council on this agenda item Mr. Gray pointed out that the National Security Council action proposed by the Council on Foreign Economic Policy (CFEP) consisted essentially of applying to other foreign countries the action taken by this Government with respect to Canada on the occasion of the Ottawa meeting in July 1958. That is, to relax our policy with respect to trade with Communist China by subsidiaries of U.S. corporations in friendly foreign countries. These exceptions to the normal prohibition against trade with Communist China by U.S. subsidiaries abroad would be limited, according to the proposed CFEP action, to situations (a) which are important to the economy of the friendly foreign country and (b) in which an indigenous company not controlled by the U.S. was unable to fill the order. It was understood that licenses for such trade by U.S. subsidiary corporations would be kept to the minimum.

Mr. Gray also noted that the Joint Chiefs of Staff opposed the proposal of the CFEP on the ground that “it is to the net disadvantage of the U.S., from the viewpoint of its military security to take actions that will ease Communist China’s problems in developing its military capability or potential.”⁴ Following upon this explanation Mr. Gray called on the Secretary of State.

Secretary Dulles stated that in his opinion this issue was primarily of political rather than of economic or military significance. The Communists have developed to a high degree of efficiency the technique of dangling before countries friendly to the U.S. prospects of large orders if only subsidiaries of U.S. corporations in these countries could be compelled to fill orders placed by Communist countries. Secretary Dulles then referred to the agreement with Canada on this matter which he and the President had reached during their visit to Ottawa last summer.⁵ Despite the relaxation which was then agreed to, in point of fact Communist China has never placed any orders with subsidiaries of U.S. corporations in the Dominion of Canada. In short, the Communist proposals are mere devices to sow discord between the U.S. and its friends. We need not expect that any orders will actually be placed by the Chinese Communists in Canada. Accordingly, Secretary Dulles felt it would be wise on the part of the U.S. to relax its policy and thus cut the ground out from under the Communist attempts to cause trouble between the U.S. and friendly foreign countries. Such a move would have no practical implications and what were essentially “phantom orders” by Communist Bloc countries would cease to be the means of creating discord between the U.S. and other friendly countries.

The President said he was reminded that another point had come up in the discussion of this problem in Ottawa. The Canadians had been faced with a domestic political problem of being obliged in effect to tell a Canadian subsidiary of a U.S. corporation in Canada that it was not subject to Canadian laws with respect to exports but was in effect subject to U.S. laws on this matter. Obviously this created a very difficult internal problem for the Canadian Government. It certainly appeared to the President to represent an infringement of Canadian sovereignty. The President added his agreement with the view of the Secretary of State that the Communist tactics in this context simply represented a needling device.

Secretaries Dulles and Anderson pointed out that almost immediately after we had agreed at Ottawa last summer to relax our hard and fast rule against trade with Communist China by Canadian subsidiaries of U.S. corporations, the Chinese Communists had withdrawn their orders for flour and for automobiles or had simply not proceeded to send in such orders. Secretary Anderson added that at Treasury’s last meeting with their opposite numbers in Canada, the Canadians had been prepared to come at us pretty harshly with respect to our attitude on trading with the Chinese Communists but we had managed to give them assurances that we were not discouraging trade with Communist China by Canadian subsidiaries and the Canadians seemed satisfied with our assurances.

The President then suggested that the U.S. should enter into a general agreement with Canada so that they would keep us informed of Communist orders for goods produced by Canadian subsidiaries so that we could talk over with them in advance the problems that such orders might present. It seemed to the President that we had been pretty tough in the past in insisting that under no circumstances could Canadian subsidiaries of U.S. corporations fill any orders placed by Communist China.

Mr. Gray pointed out that the issue with Canada had been amicably settled by a relaxation of our hitherto stern policy against trade with Communist China. What was now before the Council was a proposal that the relaxation we had entered into with respect to trade by Canadian subsidiaries of U.S. corporations be extended to cover such trade by U.S. subsidiaries located in other friendly countries throughout the world. The President said he understood this and pointed out that we should ask any such country to give us a report in advance of completing a deal whereby goods produced by a U.S. subsidiary in that country were shipped to Communist China.

Secretary Strauss said that he felt that compliance by the National Security Council with the action proposed by the CFEP would actually constitute an incentive to U.S. corporations to establish in friendly foreign countries new subsidiaries for the explicit purpose of trading with Communist China. This seemed undesirable to Secretary Strauss who therefore suggested that the Council defer action on the CFEP proposal pending completion of the forthcoming review of U.S. Economic Defense Policy in general which was now underway in the CFEP. Apropos Secretary Strauss’ suggestion, Secretary Dulles said he could see no reason why the U.S. Government could not see to it that no export licenses were granted to U.S. subsidiaries abroad if the subsidiaries had been created for the specific purpose of evading U.S. export controls on trade with Communist China. In reply Secretary Strauss said he doubted the practicability of the Secretary’s suggestion and called again for his original proposal that the Council table action on the CFEP suggestion at this time.

The President stated that he did not see how this proposal could be tabled at this time. He expressed the view that if the subsidiaries of U.S. corporations in friendly countries were wholly owned by their parent U.S. companies which, he added, was a bad thing in any case, the U.S. Government was certainly in a position to be able to protect itself against evasion of our export controls by newly formed subsidiaries created for the explicit purpose of evading these controls. Secretary Strauss was still skeptical of this possibility and said he doubted whether this Government would be aware of the export of goods to Communist China by a subsidiary corporation until after the shipment had been made. This view puzzled Secretary Dulles who inquired whether the subsidiary corporation would not have to apply for and receive a license to ship goods to Communist China. In that case we would certainly know in advance of the shipment if the subsidiary corporation were wholly U.S.-owned. Secretary Anderson indicated concurrence in this view of the Secretary of State.

Secretary McElroy pointed out that the opposition of the Joint Chiefs to the CFEP proposal was merely a repetition of their well-known view that such an action would constitute another step taken to increase the military and economic strength of the Sino-Soviet Bloc. He also asked the President to suspend judgment for a time as to the wisdom of having subsidiaries of U.S. corporations in friendly countries wholly owned by the U.S. Secretary McElroy said he could not agree with the President’s view that wholly-owned subsidiaries were bad. He thought that, particularly in newly developing countries, wholly-owned subsidiaries could be valuable to these countries. If U.S. ownership was not complete, the profits made by these subsidiary corporations might well be paid out too quickly in dividends. The President replied that he had learned his lesson as a result of having a small holding of Cocoa Cola stock. He said that it had been his experience that when there was local participation in a Cocoa Cola subsidiary abroad, the product sold better and produced greater profits.

At this point Mr. Gray closed the issue noting that the CFEP proposal had indicated that the relaxation of the U.S. prohibition would be done on a case by case basis and the Secretary of Commerce’s view that action on the CFEP proposal nevertheless be postponed pending further study. The President replied that as long as the Secretary of Commerce felt that there was need for further study of this problem before the Council took action, he was agreeable to such postponement. Nevertheless, he stated that as of now, he agreed thoroughly with Secretary Dulles’s views because of his experience with respect to Canada. Perhaps, however, there was no need of hurry in this matter. Secretary Strauss said that he could very well document cases where goods could be shipped to Communist China without obtaining a license. Secretary Dulles added that he could see no particular urgency for Council action on the CFEP proposal at this time. If specific cases came up prior to Council action, we could deal with each individual case as it arose.

Mr. Gray then stated that it appeared to be the consensus that action on the CFEP proposal should be deferred.

The National Security Council:⁶

a. Noted and discussed the recommendation by the Council on Foreign Economic Policy contained in the draft NSC Action (transmitted by the reference memorandum of December 23, 1958), in the light of the views of the Joint Chiefs of Staff (transmitted by the reference memorandum of January 14, 1959).

b. Deferred action on the recommendation in a above, pending completion of the forthcoming review of U.S. Economic Defense Policy (NSC 5704/3) now under way in the Council on Foreign Economic Policy, pursuant to NSC Action No. 1865–c.

[Here follow agenda items 2–5.]

S. Everett Gleason

0. Source: Eisenhower Library, Whitman File, NSC Records. Top Secret; Eyes Only. Drafted by Gleason on January 16.
1. See footnote 1, Document 320.
2. See footnote 3, Document 330.

3. In this memorandum, Lay transmitted to the NSC a draft NSC Action which suggested that the NSC accept the following language:

   “Agreed that it may be desirable in the national interest to make exceptions for friendly foreign countries with respect to trade with Communist China by U.S. subsidiaries abroad. (Paragraph 20, NSC 5704/3.) Such exceptions should normally be limited to situations (a) which are important to the economy of the friendly foreign country, and (b) in which an indigenous company (not U.S. controlled) is unable to fill the order. The NSC understands, however, that the licenses issued will be kept to a minimum.”

   Lay’s memorandum also contained a memorandum from Dillon to the CFEP, August 1, 1958, suggesting that the CFEP consider making such a recommendation to the NSC. (Department of State, S/P-NSC Files: Lot 62 D 1, U.S. Economic Defense Policy)

4. The Joint Chiefs made this case in a memorandum to the Secretary of Defense, January 13, which Lay transmitted to the NSC on January 14. (Ibid., NSC 5704 Series)
5. See footnote 2, Document 330.
6. Paragraphs a and b constitute NSC Action No. 2032, approved by the President on January 19. (Department of State, S/S–NSC (Miscellaneous) Files: Lot 66 D 95, Records of Action by the National Security Council)